7. The Price System: Signals, Speculation, and Prediction Flashcards

1
Q

What do markets link? And to what do they link?

A

Markets link the world (combining self interest + social interest).

Markets link to one another. (Lowered costs in one market affects another)

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2
Q

Give an example of Market Links regarding Brazil.

A

Brazil produces oil and candy.

If oil price increases, there is a shift from sugar production to ethanol production.

This holds down fuel costs but increases sugar price.

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3
Q

What is the great economic problem?

A

Arranging limited resources to satisfy all wants.

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4
Q

What is a price?

A

A signal wrapped up in an incentive.

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5
Q

What does the price system solve?

A

The information problem.

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6
Q

What is speculation? What is a strong incentive of speculators?

A

Attempt to profit from future price changes. Preparation for disruption smooths prices.

Speculators have strong incentive to be accurate to avoid money loss.

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7
Q

Define futures.

A

Contracts to buy/sell specific quantities of a commodity or financial instrument at specific prices with specific delivery times (in future).

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8
Q

Do sellers and buyers of futures agree or disagree about the future?

A

Disagree because seller and buyer think they can profit from the other.

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9
Q

What are future markets used for? Give an example for airline companies.

A

Speculation and reducing risk.

Airlines knowing fuel costs in advance can buy oil futures.

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10
Q

What does signal watching entail?

A

If future price is higher a supply disruption will occur.

Future prices are informative about future events.

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11
Q

What are prediction markets? Give an example.

A

Speculative markets where prices are interpreted as probabilities and used to make predictions.

IOWA markets about political candidates.

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12
Q

If the point of the demand curve is below equilibrium, is demand satisfied?

A

Unsatisfied

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